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HMRC suspects EBT scheme users of fraud

09 Aug 2016

Author: sarah-wilmott-att

Readers will note that, as we initially covered in our overview of the Budget, the NIC Employment Allowance faced two changes from 6 April 2016: firstly, the amount of this allowance has increased from £2,000 to £3,000 per annum; and secondly, the availability has been restricted such that it is no longer available where a director is the sole employee of the company.

The restriction for sole employee companies represented an attempt by the Revenue to rule out the incentive for taxpayers to operate via a personal service company to benefit from the NIC savings. However, astute commentators have noted that by simply bringing a second employee into the company – such as a spouse or family member – and paying them a small wage for their activities, the “sole employee” condition would not be met. The more risk averse could of course highlight concerns with regards to the potential application of the general anti-abuse rule to this arrangement, but where the remuneration was commensurate with genuine services provided by this individual it is difficult to see how this could be considered abusive.

However, the ICAEW recently noted that the Revenue’s interpretation of the law in this area differs from the understanding set out above, with a recent Employer Bulletin containing guidance which does not appear to be in accordance with the law. Instead we are informed that: “from 6th April 2016, if you are a limited company where the director is the only employee who is paid earnings above the secondary threshold, you will no longer be eligible to claim the Employment Allowance.”

There is clearly a difference between whether someone is employed, and whether someone is employed and paid earnings above the secondary threshold for NIC purposes. The former is required to ensure that the NIC Employment Allowance is available, whereas, as far as The Employment Allowance (Excluded Companies) Regulations 2016 (SI 2016/344) sets out, the latter is not.

We agree with the ICAEW that the Revenue’s interpretation of these rules is incorrect, and commend their efforts in raising this. However, advisers would be recommend to recognise the writing on the wall – regardless of whether the Revenue’s interpretation is ultimately shown to be incorrect, it is unlikely to be long before the (really quite favourable) drafting of these regulations is amended.

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